Greece's shadow economy raises fresh fears

In this world, nothing is certain apart from death and taxes – unless, that
is, you live in Greece.

The Organisation for Economic Co-operation and Development said that of the €33bn (£29bn) owed in hard-to-collect tax arrears to the Greek government in 2009, only €8bn was deemed recoverable.Photo: EPA

In a country where tax evasion is a way of life, many consider themselves outside the law when it comes to paying.

Figures compiled for The Sunday Telegraph by the world renowned expert Prof Friedrich Schneider of Linz University in Austria show that Greece's shadow economy – made up of the trade, goods and services, both legal and illegal where taxes are not paid – grew from 24.3pc of GDP in 2008 to 25.4pc in 2010.

This compares with 10.7pc of GDP in the UK, 13.9pc in Germany, 19.4pc in Spain and 21.8pc in Italy.

With around half of the country's austerity measures reliant on tax and revenue increases, and a quarter of Greece's economy out of control, many question whether Greece's government will be able to keep its deficit-cutting promises in a country that is already struggling to stay afloat.

The Organisation for Economic Co-operation and Development said that of the €33bn (£29bn) owed in hard-to-collect tax arrears to the Greek government in 2009, only €8bn was deemed recoverable.

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An inefficient legal system means that even when the law does catch up, it can take between seven and 10 years to reach a definitive verdict, hampering the government's ability to deal with cases quickly and effectively.

Sources within the Greek government's recently revamped SDOE financial crime unit say the problem stems from a lack of forologiki sinidisi or "tax conscience" which stems from an age-old distrust of the government.

Tax officials are hated, and many Greeks believe the taxes they collect will simply be pilfered or wasted on failed government endeavours.

"The size of the shadow economy depends on what Greek citizens get back from the state," says Prof Schneider.

"If you go to the hospital because your child has a bloody knee and the physician says you need to pay me a €200 bribe or I won't even look at your child, then people will think why should I have to pay taxes when I have to pay these extras anyway?"

Michael Massourakis, chief economist at Alpha Bank in Greece, says it is important to distinguish between the small traders "eating from their own flesh" and the "fat cat" evaders who believe they are above the law.

He says the luxury levies in Greece's austerity package are just "window dressing measures" that will do little to address the unfairness of a system that punishes honest taxpayers.

Others have already moved on from the question of policy and on to one of default.

"Greece's deficit targets have been so badly missed that they won't get past March," says Andrew Lilico, director of Europe Economics.

"Its options are simple – default now or default after it's got a bit more money from the IMF and Europeans."

With its economy predicted to shrink 5.3pc this year, from the 3.75pc forecast just three months ago, Prof Schneider says that the recession in Greece will now be so deep that even the shadow economy will shrink to 24.3pc of GDP in 2011.

"People have so little money that this even reduces the demand for shadow economy activities," he says.

Whether or not Greece defaults, many economists agree that it will need to take charge of its problems through structural reforms.

"There isn't any magic bullet that ends tax evasion," says Mr Lilico. "You have to try and shift the social equilibrium, establish to people the idea that you're going to require taxes of them and reward the law abiding. Once you do that, you will find that compliance becomes much more automatic to people."

This idea of teaching people to pay taxes has already been played out in Italy, which passed a new €54bn (£47.1bn) package of austerity measures on Wednesday.

The Italian government recently turned to advertising agency Saatchi & Saatchi to create two adverts aimed at tackling tax evasion.

It’s a simple message, but one that falls on deaf ears in a country where asking for a receipt can end up adding an extra €20 to your bill.

Maurizio Bovi, chief economist at the Institute for Studies and Economic Analyses in Italy, sums it up.

“The classic question among the self-employed has always been: 'The bill is €100 without a receipt or €120 with’. With VAT now raised from 20pc to 21pc in the austerity package, the only difference now is you have to pay €121.”

Mr Bovi agrees that “one shot policies” such as tax amnesties are not the solution to breaking the cycle of tax evasion - often doing more harm than good.

“Politicians are myopic. They just want to have some cash to pay back the debt, especially for the short term so they can gain political advantage.”

He adds that Italy’s problems are structural and cannot be solved overnight.

“Clearly it’s much easier to say what not to do, but one measure could be to use the extra revenue from tax evasion to lower tax rates and give people an incentive not to evade.”

“Tax evasion is a structural issue, so in the short term it’s almost impossible to achieve any gains. But clearly if you do not start – you do not arrive.”